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Money Stock Targeting, Base Drift and Price-Level Predictability: Lessons From the U.K. Experience

Author

Listed:
  • Michael D. Bordo
  • Ehsan U. Choudhri
  • Anna J. Schwartz

Abstract

It is controversial whether money stock targeting without base drift (i.e. following a trend-stationary growth path) makes the price level more predictable in the presence of permanent shocks to money demand. Developing a procedure that does not run into the Lucas critique, and applying this procedure to the case of the U.K., the paper finds that the variance of the trend inflation rate in the U.K. would have been reduced by more than one half if the Bank of England had not allowed base drift.

Suggested Citation

  • Michael D. Bordo & Ehsan U. Choudhri & Anna J. Schwartz, 1989. "Money Stock Targeting, Base Drift and Price-Level Predictability: Lessons From the U.K. Experience," NBER Working Papers 2825, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2825
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    References listed on IDEAS

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    1. William Poole, 1976. "Interpreting the Fed's Monetary Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 247-260.
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    2. Peter N. Ireland, 2025. "The devolution of federal reserve monetary policy strategy, 2012–24," Southern Economic Journal, John Wiley & Sons, vol. 91(4), pages 1247-1264, April.
    3. Nabi, Mahmoud Sami & Suliman, Mohamed Osman, 2011. "Credit rationing, interest rates and capital accumulation," Economic Modelling, Elsevier, vol. 28(6), pages 2719-2729.
    4. Bordo, Michael D. & Schwartz, Anna J., 1999. "Monetary policy regimes and economic performance: The historical record," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 3, pages 149-234, Elsevier.
    5. Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, April.
    6. Michael D. Bordo & Edward S. Prescott, 2023. "Federal Reserve Structure and the Production of Monetary Policy Ideas," NBER Working Papers 31915, National Bureau of Economic Research, Inc.

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